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MSU study predicts Clarkston-area McLaren hospital would be successful but could lead to increased health care costs

A study last year by researchers at Michigan State University indirectly found that McLaren Health Care Corp.'s proposed 200-bed hospital in Clarkston could become a financial success by filling its beds with paying patients based on Roemer's law.

But the $303 million McLaren Clarkston Hospital - proposed to be the centerpiece of the 80-acre McLaren Health Care Village at Clarkston - is on hold because of certificate-of-need denials by the Michigan Department of Community Health.

On Dec. 20, Judge Colleen O'Brien of Oakland County Circuit Court ruled against allowing the Flint-based 11-hospital system to build the hospital. O'Brien said DCH properly evaluated the proposed hospital based using CON regulations and its bed need methodology.

Last June, McClaren filed suit to reverse DCH's decision to deny a CON application for the hospital because it failed to comply with the "replacement zone" requirement, which allows bed transfers only within 2 miles of the existing hospital. The proposed Clarkston hospital is about 8 miles from Pontiac.

Greg Lane, McLaren's chief administrative officer, said Monday McLaren will appeal O'Brien's opinion. He said the company believes its CON application demonstrates a need for a hospital in Clarkston because of the distance patients have to travel for acute-care services.

"We will continue to pursue all available avenues including regulatory, legislative and legal, beginning with a vigorous appeal of Judge O'Brien's opinion, which we believe is flawed," Lane said.

Lane also rejected the validity of Roemer's Law in today's changing health care environment.

"It was a theory developed over 50 years ago and does not account for the evolution of reimbursement methods including those promoted by the Affordable Care Act," Lane said. "It serves no useful purpose in modern health or economic policy other than to misdirect or misinform."

But Paul Delamater, a post-doctoral research associate in MSU's department of geography, said the study confirmed that the 200 unused beds at McLaren Oakland Hospital in Pontiac, if allowed to be moved to Clarkston where no hospital exists, would be filled with patients.

The mathematical evaluation took into consideration the various factors that lead to hospitalization, including access to primary care, health insurance coverage and medical conditions. It also included such variables as age, gender and ethnicity.

"The paper found that the presence of the beds themselves increases (the per capita) hospitalization rate, controlling for all population aspects," said Delamater, who conducted the study as part of his doctoral dissertation.

In other words, as the supply of hospital beds increases, the use of hospital services also increases, leading to an overutilization of hospital services and contributing to higher costs, said Delamater.

New hospital could bring in big bucks

If ultimately built, McLaren Clarkston Hospital could be a big moneymaker if Roemer's Law holds true.

This is because Oakland County - which includes the Clarkston/Independence Township area - has the highest level of per capita income in Michigan at $36,138 in 2010 and one of the highest in the nation, according to the U.S. Census Bureau.

"McLaren wants to move these unused beds with the thought they will fill the beds if they move them to Clarkston," Delamater said. "The problem is Clarkston is already over-served as far as beds. McLaren says we can drum up utilization by moving our hospital there."

In its CON application, McLaren says the proposed hospital would create hundreds of construction and permanent health care jobs in the community. A study conducted for McLaren by Ann Arbor-based ThomsonReuters found a need for hospital beds in Clarkston.

Delamater said MSU's study did not directly address the need for a hospital in Clarkston, the costs of higher per capita utilization or the financial impact to surrounding hospitals.

Executives of several hospitals in Oakland County have told Crain's over the past two years there is no need for another hospital because occupancy rates are below capacity and dropping because of health care reform.

Citing another study conducted by MSU for Attorney General Bill Schuette, Delamater said the people of Clarkston are sufficiently served by the six surrounding hospitals.

"The people of Clarkston use hospital services just like everyone else in the state," he said. "Every single ZIP code has at least four hospitals within 30 minutes. This does not make them geographically or medically underserved."

Delamater said adding staffed beds to Clarkston will unnecessarily increase hospitalizations based on Roemer's Law.

"This will increase costs for everyone," he said.

Delamater said MSU did not study the effects of two new hospitals that opened nearly six years ago in Oakland County.

After also being denied CONs, Henry Ford Health System and St. John Providence Health System in 2002 won special state legislative approval to transfer beds from existing hospitals to new hospitals in Oakland County.

In 2008, 200-bed St. John's Providence Park Hospital in Novi opened, followed by 300-bed HenryFordWestBloomfieldHospital in 2009. St. Louis-based Ascension Health is the parent of St. John.

Delamater also acknowledged MSU's study did not look into whether higher-quality hospitals tend to attract larger numbers of patients than lower-quality hospitals.

"We are interested in quality, but regardless of the quality of the hospital, any hospital that adds beds will be pressured to fill those beds," he said. "That will exist regardless of the quality of the hospital."

But under health care reform, the Affordable Care Act and the push to reward quality by payers, Delamater said Roemer's Law could change.

"The Affordable Care Act could affect Roemer's Law in the future. There are incentives (built into managed care contracts) to reward hospitals more for quality measures than quantity," he said.

For example, Blue Cross Blue Shield of Michigan is shifting its payment methodology from simply paying for billable services to paying hospitals and doctors for higher quality, improved outcomes and healthier patients.

"Shifting away to paying for quality could help to reverse Roemer's Law" by lowering utilization, he said. "Roemer's Law is about making money" by filling beds with patients.

"Creating incentives to keep people healthy and out of hospitals will reverse Roemer's Law," Delamater said.